Why China Is Really Dictating the Oil Supply Glut

Building its strategic petroleum reserves while oil is cheap

By Rakesh Upadhyay, Oilprice.com

Ship-tracking data from Bloomberg shows that 83 supertankers carrying around 166 million barrels of oil are headed to China, which has stockpiled an impressive 787,000 barrels a day in the first quarter of 2016—the highest stockpiling rate since 2014.

While the world was speculating about oil prices plunging to $20 and $10 per barrel, China was busy stockpiling its reserves.

The chart below shows an increase in imports as crude prices collapsed. Since the beginning of this year, China has imported a record quantity of oil.

Back in January 2015, Reuters had reported that China planned to increase its strategic petroleum reserves (SPR) from 30 days to 90 days. In January 2016, it was revealed that China was building underground storage to complement its above-ground storage tanks.

The Chinese urgency points to two things. China believes that crude oil prices will not remain at the current levels for long, and that a disruption is possible due to geopolitical reasons, which can propel oil prices higher.

As a net importer of crude, it is protecting itself against a black swan event and using the current low prices to fill its tanks. The filled up tanks will ensure a steady supply of crude for at least three months in case of a disruption.

Does the record buying spree by the Chinese indicate a bottom in crude oil prices?

That is difficult to conclude, but it does put a floor beneath the current lows, because in all likelihood, China will resume its record buying and top up its SPR if prices tank.

The total Chinese imports in March via the very large crude carriers was 7.7 million barrels a day. Other than the supertankers, China also imports oil through pipelines and small tankers.

The Chinese demand doesn’t show a huge uptick corresponding to the rise in imports. JP Morgan estimates that in March, the total demand for oil in China was 10.3 million b/d, down 2.5 percent over the previous year and down 2.3 percent month on month, whereas the chart shows that imports are higher compared to the same period last year.

Crude oil prices have been on an upswing this month. The import data coming out of China for April will give a clue as to whether the Chinese demand remains intact at higher crude prices or the imports drop when prices rise.

If the demand drops following a rise in prices, we can assume that China doesn’t believe that the price rally will be sustained. At lower levels, Chinese buying might become a factor in deciding the bottom, as their increased imports will reduce the glut.

Similar to Saudi Arabia, which is a swing producer, China is acting like a swing consumer. However, as China doesn’t report its storage data, it is difficult to estimate how long this trend will continue.

Though other factors were involved in encouraging the bulls to buy at lower levels, the increased demand from China also helped in lapping up the excess production. If their imports drop, the world will return to the supply glut and oil prices will retrace back to the lower $30 s/b. By Rakesh Upadhyay, Oilprice.com

But the oil glut may not be over that soon – because US producers aren’t going to just give up. Read…  Why Saudi Arabia Will Not Win the Oil Price War

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  36 comments for “Why China Is Really Dictating the Oil Supply Glut

  1. Mike R. says:

    What happens when a major oil supplier doesn’t trust the “money” it is receiving for it’s valuable and finite resource? Why can’t China just “print” (electronically) it’s own currency and swap for dollars to buy oil? Who thinks the US has not done this very thing over the past decades?

    • CENTURION says:

      Saudi Arabia has a “understanding” with the US.

      We protect them with our Army/Navy (Since the Saudi Family doesn’t have one) and they agree to take our paper Federal Reserve Notes.

      • Mike R. says:

        Mine was a rhetorical comment. I know about the petrodollar arrangement.

  2. Thomas Belstler says:

    For a strategic petroleum reserve, depending on how quickly they want it filled, price may well be irrelevant. All that counts is how much is there.

  3. Chris says:

    The Chinese Government, like many of us who frequent this site, see the likelihood of a black swan event as virtually inevitable at this point.

    A few flash points:

    Endless warfare in the Middle East continues. Turkey, as well as Saudi Arabia, are actively fomenting conflict in Syria and Iraq. Assad nearly fell but for Russian intervention that re-balanced the field of combat. Arms continue to flow into this region. This conflict is far from over.

    The immigration issue for Europe is inextricably tied to the previously discussed conflict. The violence of the present conflicts in Syria, Iraq and Yemen along with the general lack of civil structure in nations recovering from prior conflicts, has led to the displacement of many millions of individuals. Europe is the only viable option for most except that Europe will no longer tolerate them. Europe is now seeing an upsurge in ultra-nationalistic parties. These parties will seek to strictly limit and reverse refugees flows into Europe. Look for the growth of massive refugee camps in a “safe zone” along the Turkish border. A veritable breeding ground for dispossessed people and a recruitment center for fighters.

    Saudi (and other) involvement in 9/11 will be forthcoming. The petrodollar system, and consequently the entire Fiat US Dollar System, are under threat of becoming undermined by these revelations. A fracturing of our relationship with Saudi Arabia will result in a potentially rapid move away from the dollar. The United States will not stand for any change in the status-quo involving the dollar’s status as the global currency of reserve.

    All of these flash points, and many others (Ukraine comes to mind), all either have or can result in war, weather direct or by proxy. The current order is coming unhinged and the dominant role of the US in the world is being challenged by other regional powers. Absent a great deal of enlightened leadership suddenly appearing on the horizon the likelihood of significant global conflict and associated disruption grows greater by the day.

    China is hedging more now than ever.

    • walter map says:

      “All of these flash points, and many others (Ukraine comes to mind), all either have or can result in war”

      The wars are already there. They simply haven’t been declared.

      In foreign policy circles the U.S. is in the embarrassing position of having created ISIS, which it now opposes, and supporting al Queda, which it created, and then opposed, and presumably will oppose again at some point in the future. One suspects an epidemic of foreign policy motion sickness at Foggy Bottom.

      You’re paying through the nose for all this military adventurism. Hope it’s worth it to you.

    • nick kelly says:

      All currencies are fiat currencies meaning they are not convertible to gold. The last one with a tie to some amount of gold was the Swiss franc.
      So now each piece of paper is a check drawn on the issuing country and backed by its economy.
      You take China I’ll take the US.
      BTW: you can’t convert either to gold, but you can convert your dollars to yuan.

  4. CENTURION says:

    China, with slave labor, manufactures plastic crap and other stuff for export. They get paper Euros and paper Federal Reserve Notes in exchange. Crap for Crap.

    Take this paper and trade it for something of real value. Oil.

    So, China stuffs every empty pit with oil. Very, very smart.

    Paper notes (garbage, trash, worthless script) for OIL. Who says these people aren’t smarter that us Europeans?

    • walter map says:

      “worthless script”

      And yet, you’re paid in this ‘worthless script’.


      • CENTURION says:

        Yes. Absolutely.

        And, after paying my bills with paper script……I buy “junk” silver Quaters and Dimes, and Krugerands and Maple Leaf Gold…….save it in my home safe…….watch it go from $260 and ounce when I started………tax free.

        Once I pay my bills with “legal tender” (paper printed by a private corporation, whose owners I am not allowed to know), I convert this paper into gold/silver so I can pass it on to my alert children who know the scam.

        I purchase valuable real-estate, with paper debt, for 15 year fixed rate terms hoping for INFLATION so I can pay back the absurd “debt” with paper notes, thereby ripping off society and future generations, and the fool who took the “note” payable in Federal Reserve Notes”. What an F’n joke.

        It is a scam. It is theft. It is beautiful, orgasmic dishonesty and the stupid public trusts their politicians, their Preacher-Man and other liars who tell them to trust. They deserve what they are getting.

        I learned the Truth at 17.

        What are you doing?

        • walter map says:

          “I learned the Truth at 17.”

          A bit of it anyway, while ignoring the rest.

          “What are you doing?”

          Pursuing my profession. No charge.

      • chris hauser says:

        good point. i think the chinese are filling up storage that they built to keep themselves busy. once they fill up, they’ll find something else to do, or maybe just build some more.

        the idea is to soak up spending. it’s an infinite loop, until it pops.

        they’ll muddle through.

    • John Doyle says:

      Not so sure. China’s earnings in the US are sitting in the Federal Reserve, to the tune of $1.4 trillion. China cannot demand gold etc in return. All they can do is find willing buyers of all their “paper” [numbers in accounts]

      So who has the better deal? China, with its earnings as numbers in accounts [in unlimited supply from the USA]? or the US, which has the real goods etc.?

      • CENTURION says:

        China should sell their T-Bills and buy American assets, like GM, Ford and Chrysler-Fiat and then shut down the US factories and import all cars from their own factories in China.

        Or, buy Boeing and move production to China since China is one of the largest buyers of jets/airplanes. Fat stupid American Union workers need to learn a lesson.

        Or, buy out what is left of the America Steel Industry and then export to America their own production of Steel. Free Trade Folks.

        China can also buy out all of our tiny computer companies (Dell, HP, etc.) and ship to us their production. Why not buy “Apple” since they, the Chinese, manufacture every Apple product?

        America is dead.

        • Wolf Richter says:

          Some of this has already happened, but not because the Chinese did it, but because US manufacturers did it. The auto component industry, for example, has largely wandered off to China since the Financial Crisis as part of the restructuring of the US auto sector.

        • walter map says:

          “America is dead.”

          No wonder you’ve defected to China.

        • interesting says:

          “America is dead”

          too fucking funny dude!!! you say that at the end of detailing how china will take over our industries and yet be forced to sell the shit they make back to us….but yet we’re dead……..circular logic at it’s finest.

        • chris hauser says:

          for some reason they don’t. or can’t.

          as to your diagnosis, are you a doctor?

  5. walter map says:

    Influences the ‘oil glut’? Certainly. ‘Dictates’ the ‘oil glut’? The author overstates his case.

    The ‘oil glut’ would be there whether or not China buys up large quantities of oil. If they weren’t buying it up the glut would be larger, but they are, so presently they are reducing the glut. Either way they certainly aren’t causing it or exacerbating it, even indirectly.

  6. Chicken says:

    I missed the connection of how China’s stocking up on oil dictates a glut, guess my reading comprehension has slumped with prices…..

    Prices go up and down with central bank currency hunger games, those battle ships you see at sea are their political chessmen and they play both sides against each other to keep the taxpayer money-spigot shams going right into their pockets, it’s become beyond obscene, the government money I see sloshing around the area I live.

    • Wolf Richter says:

      The author is saying that when prices rise, China might slow down or stop stockpiling oil, in which case, there would suddenly be a big drop in demand, which would cause the price to drop again. When it drops low enough, the Chinese start buying again.

      Oldest game in town to manipulate commodities prices. All you need is a lot of storage capacity and plenty of money. Price support programs for ag products in the US and elsewhere are based on the same principle.

      • walter map says:

        So whether they’re buying oil or not buying oil, they’re still to blame for the oil glut.

        I see.

        • Wolf Richter says:

          “Blame?” No. I’m not sure how you got there.

          But they can influence the price by leveraging their storage capacity and money. That’s all.

      • interesting says:

        “and plenty of money”

        China is printing like mad and buying up the world with their own fiat paper pegged to another currency which allows them to do so and then appreciate or devalue at will.

        then some call the other currency “toilet paper”

        • chris hauser says:

          yes, their printing makes ours look like, well, unambitious.

          i’d rather live here.

  7. dave says:

    so if china’s imports are dropping significantly Q1 is 13% lower over 2015, but their oil imports are increasing then their imports are much lower than expected. especially if they r stockpiling it. not being used for consumption. if they r building 787,000 barrels a day stock pile and the US stock piles are increasing that means daily oil over capacity is much higher than people realize. now opec is pumping more. lol. something is not adding up here. didn’t someone say $20 barrel??? unless im not getting something here, which is very possible.

    • Wolf Richter says:

      Yes, but it’s hard to nail this down exactly.

      Oil imports are increasing as measured in barrels. But the Chinese import figures are in dollars and yuan. Since the oil price plunged, imports as measured in dollars are not increasing, or are actually falling, despite big increases in volume. So with the limited data we have access to, we can only guess.

      • dave says:

        I understand it could be tough im sure there is a easy way to estimate. but regardless, its more about the surplus being built. if china decides tomorrow to stop this extra importing of oil the landscape of supply and demand would be very different. I have a very strong feeling that people are just seeing the glut that is in north America not the global glut. india I believe is also build their stockpiles. I guess as long as these countries keep taking the oil off the table, prices can rise and keep the dream alive. as it seems the central banks cant keep the liquidity flowing keeping the gears greased, hoping that if they do it long enough that an economic engines kicks into gear and we can get back on track. I realize this is a tall order but I don’t think the economic train coming to a dead stop will be good either.

        so wolf, what do they do? how do we solve the situation. I have my own thoughts but they would run counter to everything that is discussed here.

        • Wolf Richter says:

          Go ahead and share it. It’s OK to disagree as long as it’s not hateful in some way and as long as it doesn’t include some kind propaganda about a “debt jubilee” or similar (I’ve had enough of it).

  8. walter map says:

    May we discuss this?

    ‘“Blame?” No. I’m not sure how you got there.’

    Perhaps I was misled by the title of the article: “Why China Is Really Dictating the Oil Supply Glut”. It seems reasonable to suppose that if they’re “dictating” it, they are after all responsible for it, and therefore blameworthy.

    “But they can influence the price by leveraging their storage capacity and money. That’s all.”

    They can, but it has not even been conjectured that they are. Even if they were, it would not follow that they are “dictating the oil supply glut” in the absence of additional arguments showing that their price manipulation is somehow contributing to the glut.

    A proper case could be made for Saudi Arabia, because they are a major global supplier and are recognized as wilfully oversupplying. Or, more weakly, commodities futures speculators, on analysis of trading patterns. But not China, not on the basis of any evidence presented in this article.


  9. Chicken says:

    As far as anything goes, nothing would surprise me except for a full recovery within the next 20 years if ever.

    As far as China stockpiling oil thus helping to keep the price from falling through the floorboards, this news is so old I actually forgot about it thus it might be about time to revisit the possibilities.

    So thanks for the reminder!

  10. interesting says:

    “China believes that crude oil prices will not remain at the current levels for long, and that a disruption is possible due to geopolitical reasons, which can propel oil prices higher”

    or maybe it just makes sense to buy when the price is low? Is it me or is this “article” just talking it’s book? Wasn’t this site screeching peak oil not that long ago?

  11. ERG says:

    China saw a low price and took advantage of it. Not more to it than that. OTOH, the Fed is taking interest rate increases off the table faster than Janet can hit the CNTRL+PRNT button and that reduces the value of the dollar.

    What happens to the price of oil when there is a temporary surge in demand while the value of the currency used to buy it goes down?

  12. Akam15 says:

    The Chinese are not very wise when it comes to buying commodities at low prices. I believed they were stockpiling cotton near the highs. Iron and coal were also hoarded at the highs in 2012. I also recall a Chinese SOE buying Nexen in Canada for $15 billion and that’s probably valued at 80 percent less today. Not so shrewd if you ask me!

    • chris hauser says:

      reports of their wisdom are just like those of others’ wisdom.

      best to observe consistent performance.

      as to the concept of a debt jubilee, i think it’s metaphorical.

  13. Paul says:

    China gets a huge percentage of their oil from the middle east. Saudi Arabia looks anything but stable.

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